By: John S. Morlu II, CPA
What You Need to Know About Your Pay and Taxes
Serving in the military comes with unique financial benefits and responsibilities. When it comes to taxes, some parts of your pay must be reported as income, while other parts may be excluded from taxation. Knowing which types of pay are taxable and which are not can save you time and ensure you file your taxes correctly. This guide breaks it down in simple terms to help you understand your military pay and taxes.
Pay You Must Report on Your Taxes
As a servicemember, certain types of pay are considered taxable and must be included in your gross income when filing your tax return. Table 1 lists these types of pay, which are generally taxable unless they are earned in a combat zone. If you earned pay in a combat zone, refer to Table 2 for rules on tax exclusions.
Table 1: Military Pay That Must Be Reported (Taxable Pay)
Other PayAccrued leave, personal use of government vehicles
| Type of Pay | Examples |
| Basic Pay | Active duty, training, cadet pay |
| Special Pay | Bonuses for foreign duty, diving duty |
| Bonus Pay | Reenlistment, officer bonuses |
| Incentive Pay | Submarine, hazardous duty pay |
| Other Pay | Accrued leave, personal use of government vehicles |
Here are some examples of taxable pay in more detail:
- Basic pay: This includes the regular pay you receive for performing your military duties. Whether you are on active duty, attending reserve training, or completing drills, this income is taxable.
- Special pay: Additional compensation for specific roles or conditions, such as foreign duty, hardship duty, or diving duty, falls under this category. For example, if you are stationed outside the continental U.S., you may receive foreign duty pay, which is taxable.
- Bonuses: These include enlistment bonuses, reenlistment bonuses, and other incentives offered for achieving specific milestones or taking on certain commitments. All bonuses are considered taxable income.
- Incentive pay: This pay compensates for hazardous or specialized jobs, such as submarine duty or parachuting operations. Although it rewards your unique contributions, it is still taxable.
- Other pay: Payments like accrued leave (unused vacation time), allowances for personal use of a government-provided vehicle, and certain student loan repayment programs are taxable.
Pay You May Not Need to Report
Some types of military pay are excluded from taxable income. While these amounts may still need to be documented on your tax return, you do not pay taxes on them. Table 2 highlights these exclusions.
Table 2: Military Pay That Is Not Taxable (Excluded Pay)
| Type of Pay | Examples |
| Combat Zone Pay | Pay for active service in combat zones |
| Disability Pay | Pay for injuries from combat |
| Living Allowances | Basic housing, subsistence (food) |
| Moving Allowances | Expenses for moving and relocation |
| Family Allowances | Emergencies, dependents’ education |
Here are more detailed examples of non-taxable pay:
- Combat zone pay: If you are serving in a designated combat zone, most of your income earned during that time is tax-free. This applies to basic pay, bonuses, and certain special and incentive pays earned in the combat zone.
- Disability pay: Payments related to injuries sustained during military service, especially in combat or hazardous situations, are excluded from taxation.
- Living allowances: This includes the Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS). Additionally, housing and cost-of-living allowances for servicemembers stationed overseas are also tax-exempt.
- Moving allowances: Relocation expenses, such as moving household goods, temporary lodging, and dislocation allowances, are not taxable. These allowances are meant to cover the costs of moving due to a permanent change of station.
- Family allowances: Payments to cover emergencies, education expenses for dependents, or separation from family due to duty requirements are tax-free.
Special Notes
Understanding a few additional details about military pay can help you make informed decisions:
- Death gratuity payments: If a servicemember passes away, the payment made to their survivors is entirely tax-free.
- Basic Allowance for Housing (BAH): Although BAH is excluded from income, you can still deduct certain expenses paid with this allowance, such as mortgage interest or property taxes, when itemizing deductions on your tax return.
- Thrift Savings Plan (TSP): Contributions to a TSP made with tax-exempt combat pay are not subject to taxes, but the earnings on those contributions may be taxable when withdrawn. Roth TSP contributions are made after-tax, and qualified distributions from Roth accounts are not taxable.
When in Doubt
Filing taxes as a servicemember can be complex. If you are unsure about whether certain types of pay are taxable or need guidance on your tax return, consult the IRS instructions, your base legal office, or a tax professional familiar with military tax rules. This guide is designed to help you understand your obligations and benefits, but expert advice can ensure accuracy and maximize your tax benefits.
Author: John S. Morlu II, CPA is the CEO and Chief Strategist of JS Morlu, leads a globally recognized public accounting and management consultancy firm. Under his visionary leadership, JS Morlu has become a pioneer in developing cutting-edge technologies across B2B, B2C, P2P, and B2G verticals. The firm’s groundbreaking innovations include AI-powered reconciliation software (ReckSoft.com) and advanced cloud accounting solutions (FinovatePro.com), setting new industry standards for efficiency, accuracy, and technological excellence.
